Academic journal article Global Virtue Ethics Review

How Sour Is the Apple Inc.? What the Rest of the World Can Learn about Financial Reporting from Apple's Less Than Exemplary Role Modeling

Academic journal article Global Virtue Ethics Review

How Sour Is the Apple Inc.? What the Rest of the World Can Learn about Financial Reporting from Apple's Less Than Exemplary Role Modeling

Article excerpt

Introduction

On January 23, 2013, with the announcement that the Company did not meet analysts' objectives for iPad and iPhone sales for the first quarter because of supply issues, Apple Inc.'s stock fell 12.36 percent, resulting in the loss of $59.64 billion in market capitalization (1). Many just chalked it up to the bad quarter. Indeed, both investors and consumers love the company. Before and since this event, investors have earned extraordinary returns on Apple stock as the company continues to set records for largest market capitalization in history. Further, consumers seem to care less about the ethics of the company so long as they receive the latest iPad or iPhone for Christmas. Lost in all the love is company executives' seemingly ever-present unethical financial reporting, culminating in the events that led to that almost record-setting stock market capitalization decline.

This article demonstrates Apple's unethical financial reporting for the world to judge whether the Apple way is the new normal or the final warning for those individuals interested in virtue ethics to begin intervening.

This article is the first in recent years to critique Apple's financial reporting as the company is viewed as otherwise untouchable. The article proceeds by analyzing whether Apple executives' financial reporting has been so unethical that it rises to the level of being securities fraud. Whether the reader agrees or not in the level of fraudulent reporting, this type of close examination provides greater evidence of the degree to which unethical reporting occurs.

Methodology

To prove securities fraud, plaintiff securities class action firms must show intentional or reckless materially false or misleading statements of or omissions of, facts resulting in reliance by investors, causing damages to those investors (2). The important elements are the level of intent, materiality, misstatement or omission, fact, damages, causation, and reliance (3). The only difficult element to demonstrate usually is the level of intent, direct knowledge of the fraudulent reporting in which the person is engaging or at least reckless disregard with regard to the truth of the reporting.

Discussion

Intent

On April 18, 2012, Qualcomm, Inc., Apple's 28nanometer chip supplier for the iPhone 5, announced that it would have supply issues for all its clients through the end of the 2012 calendar year and extending into the start of 2013.

On October 25, 2012, Apple's Chief Executive Officer (CEO) announced that there would be no supply issues for the iPad and iPhone for the next quarter through January 23, 2013. But in January, Apple's CEO announced that there had, in fact, been supply issues for the iPad and iPhone that materially lowered sales during the quarter. These materially lowered sales caused the analysts' objective for iPad and iPhone sales to be missed.

Thus, Apple's CEO knew that he was misleading the public in reporting that there would be no supply issues. If Qualcomm, Inc., Apple's supplier notified financial analysts on April 18, 2012, that there would be supply issues, that supplier certainly also notified Apple of this fact at least by that date. Apple's CEO intentionally or at least recklessly misled the public with that announcement on October 25, 2012. Further, the CEO also intentionally or at least recklessly omitted announcing to the public as early as April 18, 2012 that there would be supply issues.

Materiality

As iPads and iPhones comprised most of Apple's annual sales, not having a sufficient supply to satisfy the projected demand was certainly significant enough to be material. In fact, Apple's yearly earnings guidance was based on the projected demand, which the executives knew as early as April 2012, could not be satisfied with adequate supply given Qualcomm's issues.

Misstatement

The misstatement occurred during the October 25, 2012 public announcement that there would be no supply issues except possibly for the iMac. …

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